August 17, 2023
Attendance will remain light through Labor Day as we enter a catalyst vacuum over the next week, which we expect to result in trend continuation for equity markets. In the current environment, trend continuation suggests gradual downside. Yesterday’s release of Fed Minutes signaled balanced risks and a data dependent approach. This probably reduces the importance of next Thursday’s Jackson Hole summit and increases the importance of upcoming data, specifically next Friday’s Jobs Report and the August CPI print on 9/13.
Yesterday, 10-year nominal yields broke above the cycle high at ~4.20% with first line technical resistance just ahead at ~4.34%. The upside breakout in bond yields creates a headwind for the S&P 500 (SPX). Higher bond yields increase the cost of capital, reduce corporate profit margins, reduce terminal values and pressure equity multiples. The SPX is currently teetering on the edge of technical support at 4405 with a sustained lower close opening the door for a test of ~4200. Implied equity volatility as measured by the VIX Index isn’t a threat for equity markets at its current level of 17.10. Implied equity volatility does become a threat at VIX levels north of 22 and we recommend keeping a close eye on volatility as the SPX flirts with technical support.